What is margin?
In context of company / business finance, the gross profit margin represents the percentage of total sales revenue (Net Revenue) retained by a company after deducting the costs that are directly associated with producing goods i.e. direct cost.
Lower gross margin percentage indicates, that company has higher material and / or labor costs i.e Direct production cost. On the other hand, higher gross margin allows company to have more money to be spend on it operations (Operating cost).
It also helps in comparing company’s performance with the performance of another company or its own performance over the last few years or may be only previous year.
How to Calculate Gross Profit Margin?
- Determine your COGS (Cost of goods sold).
- Find out your revenue.
- Substract COGS from revenue. The answer will be gross profit ($).
- Divide gross profit by revenue and multiply the answer by 100. The output will be gross margin. It is represented in percentage.
Gross Profit vs Gross Margin
Gross Profit is the revenue a company has retained after incurring its direct production cost. It is expressed in absolute dollar amount. While Gross Profit Margin is the ratio between company’s gross profit and its revenue and it is expressed as percentage.
Example of usage can include: Gross Profit Margin allows us to compare performance of two different companies. For example, Company A made gross profit of $50,000 and Company B made gross profit of $100,000. Comparing their performances on the basis of the absolute dollar amount may not make sense. Their circumstances, market share and business models may be different. Or looking at their revenue amount may tell you a completely different story. Remember gross profit is amount after deducting cost of goods sold from revenues.
In such scenarios, gross profit margin allows us to make reasonable comparison between performance of two companies. Consider this example: Company A has gross margin of 5% and Company B has gross margin of 7%. Without any other information available we can consider performance of Company B better than Company A.
Margin vs Markup
The difference between margin and markup may be a little confusing at first but it really trivial technically.
Margin is the relation between profit and revenue. This relation is expressed as percentage. While markup is a percentage by which cost of goods are increased in order to reach desired selling price.
Consider the formulas below while calculating margin or markup:
Formula for margin:
(Gross Profit / Revenue) * 100
Formula for markup:
Cost of goods * markup %
How to calculate margin from markup?
To convert margin into mark you can use this simple formula:
Markup = Margin / (1 - Margin)
Also, in case you need to convert margin into markup you can following formula
Markup = Margin / (1 - Margin)
Whether you are trying to understand your business’s financial statement / Profit and loss statement or making a report for your company or its a university project. Please remember people sometimes use some terms interchangeably. For example: Gross Profit is referred to GP. Gross Margin is referred to Margin or Gross Profit Margin.